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the study of human efforts to satisfy seemingly unlimited wants through the use of limited resources

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economics

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consumers and producers in a market setting. 1. Households, both as consumers and resource owners. 2. Businesses demand resources and supply goods and services. 3. Government also demands resources and supplies primarily services. 4. The Rest of the World The circular flow model shows the relationships between these four sectors.

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economy

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are tangible items used to satisfy human wants. A good is something you can see, feel, and touch; it requires scarce resources to produce. Services are intangible activities used to satisfy human wants.

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goods

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are intangible activities used to satisfy human wants.

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services

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A good and service is scarce if the amount people desire exceeds the amount available at a price of zero. Without scarcity, there would be no economic problem and no need for prices

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scarcity

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Traditional, Command, free market, mixed market. See power point

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markets

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is the study of the economic behavior of the entire economy. It is a study of the economy as a whole

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macroeconomics

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is the study of the economic behavior in particular markets. It is a study of parts of the economy.

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Microeconomics

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additional, refers to a change in an economic variable, a change in the status quo.

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marginal

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What should be "opinion"

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normative economic statement

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Statement of fact, does not have to be true though.

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positive economic statement

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alternatives that must be given up when one is chosen over another

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trade off

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of the chosen item or activity is the value of the best alternative that is forgone. You can think of opportunity cost as the opportunity lost.

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opportunity cost

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is the ability to produce something using fewer resources than other producers use.

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Absolute advantage

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is the ability to produce something at a lower opportunity cost than other producers face.

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Comparative advantage

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states the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good.

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Law of Comparative advantage

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is organizing production of a good into its separate tasks.

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division of labor

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focuses an individual's efforts on a particular product or a single task. ( 1. takes advantage of individual preferences and natural abilities, 2. Allows workers to develop more experience at a particular task, 3. Reduces the time required to shift between different tasks, and 4. Permits the introduction of labor-saving machinery.)

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Specialization of labor

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something that one must have for survival

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needs

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more of a trivial wish for something rather than a need.

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want

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A resource is considered scarce if it is limited in terms of people wants. Ex: Air is a resource but not scarce, oil is a scarce resource.

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What determines whether a resource is considerd scarce? What is the importance of this scarcity to the definition of economics?

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1. Labor: the physical and mental effort that goes into the production of goods and services. 2. Land: all natural resources - all so-called "gifts of nature". 3. Capital: goods that are used to produce and distribute other goods and services. 4. Entrepreneurship: managerial and organizational skills needed to start a firm, combined with the willingness to take risks.

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List the four factors of production and the payments that resource sellers receive for each resource.

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What goods and services will be produced? How will goods and services be produced? How much should be produced? For whom will goods and services be produced? Remember: An economic system is the set of mechanisms and institutions that resolve the what, how, how much, and for whom questions. Some criteria used to distinguish among economic systems are (1) who owns the resources; (2) what decision-making process is used to allocate resources and products, and (3) what types of incentives guide economic decision makers.

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3. List and explain the four basic economic questions.

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traditional, command, market. See power point for pros and cons

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4. List, define, and give examples of the three basic economic systems. Give two strengths and two weaknesses of each.

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means that individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit. Rational choice takes time and requires information, but time and information are scarce and valuable. Rational decision makers will continue to acquire information as long as the additional benefit expected from that information exceeds the additional cost of gathering it.

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6. Explain ration self-interest.

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Economic choice is based on a comparison of the expected marginal cost and the expected marginal benefit of the action under consideration. Marginal refers to a change in an economic variable, a change in the status quo. You, as a rational decision maker, will change the status quo as long as your expected marginal benefit from the change exceeds your expected marginal cost.

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7. Explain marginal analysis.

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The Fallacy That Association Is Causation: if two variables are associated in time, one must necessarily cause the other. (Fallacy of Superstition) The Fallacy of Composition: what is true for the individual, or part, must necessarily be true for the group, or whole. The Mistake of Ignoring the Secondary Effects: unintended consequences of economic actions that may develop slowly over time as people react to events. Analogical Fallacy: taking a comparison to its logical extreme. The Fallacy of Absolutes

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8. List and explain five (5) logical pitfalls to be avoided in developing economic theory.

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states the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that goo

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9. Explain the Law of Comparative Advantage.

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A production possibilities frontier is a curve showing alternative combinations of two types of goods that can be produced when available resources are used fully and efficiently. Resources are employed fully and efficiently when there is no change that could increase the production of one good without decreasing the production of the other good. Our model's simplifying assumptions: 1. We limit the output to just two broad classes of products. 2. The focus is on production during a given time period—in this case, a year. 3. The resources available in the economy are fixed in both quantity and quality during that period. 4. The available technology does not change during the year.

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10. Define the production possibilities frontier, draw a production possibilities curve, and list three assumptions made when using the PPF.

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1.Efficiency 2. Scarcity 3. Opportunity cost 4. The Law of Increasing Opportunity Cost 5. The need for choice

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12. List five (5) economic concepts illustrated by the PPF.

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1. Is able to adjust to change. 2. Individual freedom 3. Decentralized decision-making. 4. Incredible variety of goods and services. 5. High degree of consumer satisfaction

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13. List four characteristics of our free enterprise economy.

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see powerpoint

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14. Draw and label a circular flow diagram of goods and services and use it to explain the interdependent nature of a market economy.

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When we talk about demand, we are talking about effective demand. To have effective demand, the following conditions must be met: 1. The product must satisfy a want or a need. 2. The consumer must be able to pay for the product. 3. The consumer must be willing to take both, the desire and the ability, to the market.

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Demand

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The Law of Demand states that there is an inverse relationship between the price of a good or service and the quantity demanded.

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2. Law of Demand

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1. The Substitution Effect: When the price of a good falls, consumers substitute that good for other goods, which are now relatively more expensive. Remember that it is the change in the relative price—the price of one good relative to the prices of other goods—that causes the substitution effect.

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3. substitution effect

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2. The Income Effect: A fall in the price of a good increases consumers' real income, making consumers more able to purchase all goods. An increase in the price of a good, other things constant, reduces real income, thereby reducing the ability to purchase all goods. Because of the income effect of price changes, consumers typically change the quantity demanded as the price changes. Money income is held constant along a given demand curve.

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4. income effect

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A good for which demand decreases as consumer incomes rise, or demand increases as incomes fall.

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inferior good

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A good for which demand decreases, or shifts to the left, as consumer incomes falls. Demand increases with an increase in incomes.

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normal good

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satisfaction a consumer receives from a product after repeated use. Ex: Glass if water after mowing the lawn.

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diminishing marginal utility

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the ability of any good or service to satisfy consumer wants

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utility

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otherwise known as substitutes or compliments.

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